Summer is around the corner and getting the pool ready is a top priority! But if you have kids, like I do, you also know that amidst the fun and sun it’s essential to prepare for swimming hazards. The critical word here is prepare.
Today’s equity markets are no different. We’ve been basking in the “fun and sun” of new equity market highs, but the time to defend against the next downturn isn’t after it happens.
Defend Your Portfolio
One way to add resiliency to your portfolio is by allocating to defensive equity strategies. After all, equity returns with less risk is an alluring proposition; unfortunately, it seems to fly in the face of a fundamental economic tenet that risk is compensated with higher return.
The actual thesis is that higher returns generally require more risk. This is often confused with the false claim that more risk will result in higher returns. Simply put, being defensive is mostly about two things: (a) recognizing and avoiding uncompensated risk and (b) minimizing drawdown. To make this clearer, we’re offering a fresh look at this maturing and important category in our recent paper, How to Make Your Equity Portfolio More Resilient.
Focus on Outcomes
Among the topics in our paper is an actual definition of defensive equity investing. Many definitions appear in the pages of journals, the financial press and websites. Regrettably, the authors typically embrace a financial economics paradigm and start with the presupposition that forecasting returns is the only possible source of outperformance for any strategy. This leads to definitions based on fundamentals or factors; instead, we offer a more neutral one based on the outcomes these strategies seek:
In short, defensive equity strategies attempt to improve risk-adjusted returns by avoiding uncompensated or asymmetric risk.
Po-tay-to, Po-tah-to
Whichever way we ultimately wish to define defensive equity, we have to concede that defensive equity investing is a captivating thesis. The evidence is both persistent and global (Figure 1). A partial allocation to defensive equity strategies offers meaningful potential to add resiliency to your portfolio.
Learn More
The longest bull market in history, persistently low interest rates and increasing longevity are driving many to take a hard look at defensive equities investing. That’s why we’re offering a fresh look at the topic: How to Make Equity Allocations More Resilient.
The information expressed herein is subject to change based on market and other conditions. The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. This information should not be used as the sole basis for investment decisions. All content is presented by the date(s) published or indicated only, and may be superseded by subsequent market events or other reasons. Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal and fluctuation of value. Hypothetical performance results presented are for illustrative purposes only. Hypothetical performance is not real and has many inherent limitations. It does not reflect the results or risks associated with actual trading or the actual performance of any portfolio and has been prepared with the benefit of hindsight. Therefore, there is no guarantee that an actual portfolio would have achieved the results shown. In fact, there will be differences between hypothetical and actual results. No investor should assume that future performance will be profitable, or equal to the results shown. Hypothetical results do not reflect the deduction of advisory fees and other expenses incurred in the management of a portfolio.